Small Firms May Soon Turn To Crowdfunding To Sell Shares

Crowdfunding is popular among musicians, filmmakers and artists looking for a way to finance their next project.

Now the Securities and Exchange Commission is considering rules that, for the first time, would allow small companies to solicit investments over the Internet and sell shares to the general public.

For some small firms, these new rules come as welcome news.

Shane Emmett, CEO of Health Warrior, which makes a line of nutrition bars made of chia seeds, says his company is looking to raise money and would consider doing so under the SEC rules.

Currently, private companies are only allowed to solicit funding from accredited investors — essentially wealthy people with a net worth of $1 million, excluding their homes. But the new rules would allow companies to raise as much as $1 million a year from lower net-worth people by selling shares. Regulations are needed because last year's Jumpstart Our Business Startups (JOBS) Act allows small investors to obtain equity stakes in startups and other small businesses.

"It's a really interesting opportunity, I think, not only for companies that are getting bigger, like Health Warrior, but for companies that are smaller and aren't fortunate enough to have ready access to capital from high net-worth individuals," Emmett says.

He says it's the smallest companies, like his, that take big risks and potentially return big rewards. But most startups fail. Emmett says he considers his business high risk.

And there's the rub: How do you disclose that risk to the general public?

Barbara Roper, director of investor protection for the Consumer Federation of America, is a critic of the proposed equity crowdfunding rules.

"We have grave concerns about the concept. You are talking about a market that, by its very nature, brings together inexperienced issuers with unsophisticated investors and harnesses the power of the Internet to hype the stock," Roper says.

She says the new rules will help some small companies gain access to capital. But she sees the risks as unacceptably high and the protections as too weak.

"We are dismantling our public markets in favor of these loosely regulated private markets," Roper says.

Judd Hollas, CEO of EquityNet, an online investment platform, disagrees. He says the new market that will be created will match more investors with small companies.

"It will increase the size of our market, at least on the investor side, on the order of 10 [times], so you're talking nearly a thousand percent increase," he says.

Hollas adds that his site has tools that will help that new flood of investors gauge the risks of each investment.

Rory Eakin is founder and chief operating officer of CircleUp, another online investment platform. He sees a downside for companies in the new rules — namely, that they would require costly audits and a great deal of public disclosure about the company's risks and business plan.

"I think many companies would be concerned about that level of disclosure and the potential expense involved in raising capital that way," Eakin says.

He says he fears that the best companies won't want to disclose their proprietary information and will therefore forgo equity crowdfunding for the more traditional fundraising methods.

The SEC is in a 90-day public comment period on the proposed rules. After that, the commission will review the comments and determine whether to adopt the rules.

Copyright 2013 NPR. To see more, visit http://www.npr.org/.

Transcript

DAVID GREENE, HOST:

Crowdfunding has been around for some time now. I'm thinking about artists using websites like Kickstarter to finance their next project. Well, now the Securities and Exchange Commission is considering new rules that would give small companies more options. For the first time, startups could raise up to a million dollars by selling shares over the Internet.

Here's NPR's Yuki Noguchi.

YUKI NOGUCHI, BYLINE: Shane Emmett and I are standing in the nutrition bar section of a Washington, D.C. Whole Foods supermarket, staring at his competition.

It's so intimidating to look at this, the wall of bars.

SHANE EMMETT: Yes, the wall of bars. The great wall of bars.

NOGUCHI: Larabar, Lunabar, Z Bar, Clif Bar...

Stacked end-to-end, there are probably 200 different types.

EMMETT: Most of them aren't very good for you. Most of them are candy bars.

NOGUCHI: Emmett is CEO of Health Warrior, which makes Chia Bars. They're made from the same seeds used to make Chia Pets - though the bars are neither green nor leafy. The company started two years ago, and business has grown, but so has the competition.

EMMETT: There were 685 new bars released in the last 52 weeks, which is a pretty daunting number.

NOGUCHI: Stiff odds, but Health Warrior was able to raise millions of dollars in seed money, if you will, in the first round. And sales increased quickly.

Now Emmett says the company is looking to raise more money, and may consider doing so under the new SEC rules. Currently, private companies are only allowed to solicit funding from accredited investors - essentially wealthy people with a net worth of $1 million excluding their homes. But the new rules would allow companies to raise as much as $1 million a year from lower net worth people by selling shares.

EMMETT: It's a really interesting opportunity, I think, not only for companies that are getting bigger, like Health Warrior, but for companies that are smaller and aren't fortunate enough to have ready access to capital from high net-worth individuals.

NOGUCHI: And there's the rub. How do you disclose that risk to the general public?

Barbara Roper is director of investor protection for the Consumer Federation of America and a critic of the equity crowdfunding rules.

BARBARA ROPER: We have grave concerns about the concept. You are talking about a market that, by its very nature, brings together inexperienced issuers with unsophisticated investors and harnesses the power of the Internet to hype the stock.

NOGUCHI: She says the new rules will help some small companies gain access to capital. But she sees the risks as unacceptably high - and the protections as too weak.

ROPER: We are dismantling our public markets in favor of these loosely regulated private markets.

NOGUCHI: Judd Hollas disagrees. He's CEO of EquityNet, an online investment platform, and he takes a more favorable view of the proposed rules, saying the new market that will be created will match more investors with small companies.

JUDD HOLLAS: It will increase the size of our market, at least on the investor side, on the order of 10X. So you're talking nearly a thousand percent increase.

NOGUCHI: Hollas adds his site has tools that will help that new flood of investors gauge the risks of each investment.

Rory Eakin is founder and chief operating officer of CircleUp, another online investment platform. He sees a downside for companies in these new rules. Namely, that it requires costly audits and a great deal of public disclosure about the company's risks and business plan.

RORY EAKIN: I think many companies would be concerned about that level of disclosure and the potential expense involved in raising capital that way.

NOGUCHI: Eakin says he fears the best companies won't want to disclose their proprietary information, and will therefore, forego equity crowdfunding for the more traditional fundraising methods.

The SEC is in a 90-day public comment period on the proposed rules. After that, the commission will review the comments and determine whether to adopt them.